Do positive stock-bond correlations kill the case for #hedgefunds? Using PivotalPath data, the bubble chart below shows the correlation of various #hedgefund strategies to #stocks (horizontal axis) and #bonds (vertical axis) -- scaled by current AUMs. Most strategies are, and have always been, positively correlated to #equities but with lower #volatility. Hence, when stock-bond correlations were negative, hedge funds overall could be positioned as a fixed income substitute, something I wrote about in 2021: https://lnkd.in/endwxVaQ When stock-bond correlations flip to positive, though, most hedge fund strategies will have high correlation to BOTH stocks and bonds. The data below covers both negative and positive regimes. Assuming positive is the New Normal (see research from AQR Capital Management, Verdad Advisers and others), most bubbles will gradually slide down to the lower left -- not a good place to be. Of course, an astute allocator might notice that the #macro and #cta bubbles are quietly floating on the upper right -- the #diversification sweet spot. Maybe it's time to pump those up and deflate the others?
Andrew Beer
2mo
Kaushik Ganesan the baton is yours
Bob Elliott
2mo
Good note. Macro and Managed futures are true diversifiers. L/S equity should be thought of as an equity replacement, but needs to be run at equity vol in order for it to make sense for an allocator, otherwise the return loss w/low diversification makes the strategy imprudent to allocate toward.
Peter Rose
2mo
Great post…🙏🏽….also an interesting thing to do is drill into these strategies and looking the rolling correlations. If you have the data you should do this over a larger time period. Then also run the growth of AUM in the industry. Then break it down into AUM by strategy.
George Lucaci
2mo
Andrew: Excellent graph. Investors being underweight managed futures should ask their allocator /Wealth Manager/PM why that is the case. I’m guessing the answers will not be logical. No excuses.
Nicholas L.
1mo
Love this
Managing Member at DBi
2moMarco Pabst alley oop. https://www.linkedin.com/posts/marcopabst_hedgefunds-sharpe-investing-activity-7244246728256688128-EdWV?utm_source=share&utm_medium=member_desktop